Rent Vs. Buy: 6 Important Factors To Consider
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The rent vs. buy debate is literally one of the oldest in the world of personal finance.
It’s almost as hotly contested as what type of financial institution you should use for your banking needs.
Or the credit card vs. cash-only lifestyle clash.
Such a stupid point of contention, yet the rent vs. buy debate is still one that rages on, and probably will forever.
Is it better to have a mortgage payment?
Is paying rent better?
Is one truly better without any context?
Or, and this may just blow your mind, is it just a matter of preference and/or circumstance?
People who prefer homeownership will say renting a home is a waste of money.
People who prefer renting a home will say homeownership is a waste of money.
That’s the problem with many topics–people can’t look at things objectively.
It’s always rent vs. buy as the “experts” see it.
The way they do something is the only/best way to do it.
Personal finance in general is no different, and sometimes even worse.
That’s evident by the arguments that arise when the topic turns to the decision to rent vs. buy a home.
I’m not about that silliness.
Instead, I want you to think of things in a pragmatic, unbiased way.
With all that said, let’s look at the (mainly non-monetary) factors you need to think about when deciding whether to rent vs. buy your home.
1. HomeOwnership Isn’t For Everyone
It might be difficult for some people to hear, but it’s true.
Not everyone is cut out for homeownership.
It’s similar to being a business owner.
People fall in love with the idea, but when they learn about what is actually required, they end up quitting.
Someone may think it’s great to say they own their home, but they probably never think about stuff like:
- Real estate taxes
- Homeowners Insurance (storm, wind, flood, etc)
- Landscaping
- Home Owner’s Association (HOA) dues
- Exterior upkeep (required and enforced by the HOA)
- Repairs and replacements
It is a lot of work and responsibility
Even if you are “aware” of what homeownership entails, it doesn’t often hit you until you are actually in there.
Let’s not forget if they get tired of the home itself, the neighborhood, or the neighbors, they can’t simply choose to not renew the lease.
They have to go through the sales process to escape (or simply abandon their property) to get away from it all.
And it’s perfectly fine to be one of those who aren’t cut out for home ownership, there’s absolutely no shame in it.
Knowing where you stand makes the decision to rent vs. buy much easier!
2. Renting A Home Gives You Flexibility
Are you going to be starting a family soon?
Do you have plans to expand your family?
Are you committed to staying in the area where you are looking long-term?
Are you in a career or do you have a job?
All of these questions go into settling the rent vs. buy dilemma.
Renting a home is the perfect option for people in these types of situations.
If you are unsure of your immediate future, you definitely want to choose the renting option in the rent vs. buy debate.
Renting a home gives you the ability to go year-to-year (or shorter) without being locked into a long-term commitment.
If your situation changes, you can adjust your housing situation relatively easily.
Homeownership on the other hand requires you to go through the sales process if your family, financial, or job situation changes.
In many cases, it forces you to either wait until you can sell your home or you have to carry two mortgages or a mortgage plus the new rental depending on how the situation shakes out.
What’s worse with owning is that with all of the closing costs and the way amortization works, you are going to lose quite a bit of your money if you have to sell in the early years of homeownership.
3. Homeownership May Be Easier For Repairs
Getting a landlord to make repairs or replace stuff can be a pain and test your patience.
Don’t get me wrong, homeownership doesn’t give you the freedom to do anything.
You still have plenty of people/entities giving you rules to follow (read the above link for more info on that).
But when it comes to things like getting things repaired or replaced, you have much more control as a homeowner than by renting a home.
Think of it this way:
Let’s say you are like a friend of mine who was renting an apartment in Miami Beach.
Her oven stopped working on a Friday and she couldn’t even get a hold of anyone until the following Monday to get it checked out.
When they finally came to look at it, they wanted to try to “fix it” first.
When the maintenance department couldn’t get it working right, they had to get authorization from the landlord to replace it.
It took a week, and the replacement looked like it was straight out of the 1980s, and was probably a refurbished item.
Me, on the other hand, as a homeowner, when my own oven stopped working, I went online that second and ordered a replacement that looked like it belonged in a home in the 2020s lol.
Plus, it was delivered and installed within two days.
Sure, I’m the one that had to pay for it, but besides getting the benefit of having it for as long as I own my home (or the new one breaks too hahaha) I got something new quickly.
To be clear, this isn’t a knock against people who like a retro look.
It’s simply a comparison of how much more control over what and when you can get repairs and replacements done when considering the decision to rent vs. buy.
4. Renting A Home Is An Easier Process
This assumes a mortgage will be involved, not buying a home with cash.
When thinking about the speed at which you can be moved in in the rent vs. buy consideration, renting a home will generally be the option of choice.
Granted, you can’t just walk up to a landlord or management company and say “I want to rent this property” and automatically get a key.
You do have to go through a process, although the rental application process is normally much shorter and less involved than a mortgage application process.
For both, you have to:
- Have a credit check performed
- Verify income
But That’s where the similarities end.
One big difference does exist in the credit score department.
Renting a home generally only requires a credit score in the high 500-low 600 range and doesn’t normally impact your monthly rent payment.
Mortgages, on the other hand, will have different interest rates–and therefore different monthly payment amounts–depending on your credit score.
The remainder of the rental approval process only involves:
- Criminal background check
- Rental history
- Employment verification
This is because the landlord or rental company wants to make sure that you will be able to make your monthly payments, that you aren’t a bad tenant/neighbor, and that you aren’t a criminal to a certain degree.
The mortgage approval process, however, is much more involved, especially if you’re a first-time home buyer.
In addition to the credit score and income verification, you will also:
- Provide individual income taxes
- Provide bank statements
- Allow the release of income tax returns by the IRS for verification
- Provide W-2s and paycheck stubs
- Get an appraisal
- Have the property inspected
- Go through a title check
- Sign a million documents
- Provide business tax returns, bank statements & profit & loss statements (if self-employed)
And that’s just the non-cash stuff!
When it comes to the decision to rent vs. buy a home, renting a home surely provides the quickest way to get moved in, assuming everything is in order.
5. Homeownership Offers More Stability
Many people like to have assurances in life.
That includes having a place to live which makes the rent vs. buy debate an easy one to settle.
One of the biggest non-monetary reasons people choose homeownership over renting a home is the fact that owning a home provides stability.
You have the assurance that you are not going to be asked to vacate your home at the end of a lease term.
You have the assurance that you won’t be asked to pay more to renew a lease (assuming you aren’t in an adjustable-rate mortgage or ARM).
You have the assurance that you won’t have to worry about what will happen if the landlord decides to sell the home you are renting.
All of that makes people feel more comfortable about their living situation.
Now, if you are in any of the situations from the second section we talked about and don’t plan on being in the rental property for an extended period of time, this might not be a concern to you.
6. Renting A Home Is Like A “Test Drive”
Where do you want to live:
- Florida near the beach?
- In the heart of New York City?
- The mountains of Colorado?
- The Kansas Plains?
- The Chicago suburbs?
What kind of home do you prefer:
- Fully detached or semi-attached house?
- Hi-rise condo?
- Ranch?
- Townhouse?
- Tiny home?
- RV?
The beauty of renting a home is that you can sort of test-drive different locations and/or styles of home.
If you find that one isn’t for you, all you have to do is give notice and not renew the lease then you’ll be free to try out a different place.
That is impossible with homeownership.
Not only is it a difficult process to continue buying and then selling a home, but it becomes costly as well.
So, if you don’t know where or what you want to live in, then the rent vs. buy debate isn’t really a debate at all.
Rent Vs. Buy: The money
There are always going to be monetary concerns that factor into the decision to rent vs. buy.
Especially if you have trouble managing finances and need to keep your budget as simple as possible.
You have things to think about like:
- Do you have a pretty decently funded emergency fund yet?
- Is your credit report clear?
- Do your credit card statements have balances you need to bring down?
- Do you have enough for a full 20% down payment*?
- Will the housing costs** exceed the standard 25-30% of gross monthly income?
- Do you want to save money for retirement or investment savings first?
*If you can’t come up with the 20% down payment you will have to pay for private mortgage insurance which will increase your mortgage payments
**Housing costs include everything including rent/mortgage payment, utility bills (gas/electric/water/garbage), homeowners or renters insurance, taxes, and regular maintenance (landscaping, cleaning)
The government has used 30% since as far back as 1969, but some lenders/financial institutions are now suggesting the ratio be 25%.
These points aren’t as cut-and-dry as the main 6 issues, because you can go either way in the rent vs. buy decision with many of these situations and not be as hampered as the other areas we discussed.
Wrapping Up
Personally, I don’t care what people do when it comes to a decision to rent vs. buy.
You can rent a home and I’ll be happy for and support you.
You can choose homeownership and I’ll be happy for and support you.
My only care is that people are able to provide for their families.
So, if you are looking for me to tell you which path to choose in the rent vs. buy debate, I’m sorry to be the bearer of bad news, but I think it’s not even a debate.
As long as you are doing what fits your individual needs and lifestyle, then that is what you should be choosing.
Let’s just put an end to this endless rent vs. buy debate!
Your Turn
How did you settle your own rent vs. buy debate? Why did you choose to rent a home or become a homeowner (whichever one you chose)? Did you feel any pressure from “experts” or family to make the choice you did or did you do what was the right thing for how you live or expect your lifestyle to be in the future?
